Empire State Realty OP, L.P. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context otherwise requires or indicates, references in this section to “we,” “our,” and “us” refer to the Empire State Realty OP, L.P. and its consolidated subsidiaries. This Management’s Discussion and Analysis provides a comparison of our performance for the three and nine month periods ended September 30, 2024 with the corresponding three and nine month periods ended September 30, 2023 and reviews our financial position as of September 30, 2024. The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K and Form 10-K/A. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “ Securities Act "), and Section 21E of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”). We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. You can identify forward-looking statements by the use of forward-looking terminology such as “aims," "anticipates," "approximately," "believes," "contemplates," "continues," "estimates," "expects," "forecasts," "hope," "intends," "may," "plans," "seeks," "should," "thinks," "will," "would" or the negative of these words and phrases or similar words or phrases. In particul ar, statements pertaining to ESRT's capital resources, portfolio performance, dividend policy and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our portfolio from operations, acquisitions and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). Many important factors could cause actual results, performance, achievements, and future events to differ materially from those set forth, implied, anticipated, expected, projected, assumed or contemplated in the forward-looking statements, including, among other things: (i) economic, market, political and social impact of, and uncertainty relating to, any catastrophic events, including pandemics, epidemics or other outbreaks of disease, climate-related risks such as natural disasters and extreme weather events, terrorism and other armed hostilities, as well as cybersecurity threats and technology disruptions; (ii) a failure of conditions or performance regarding any event or transaction described herein; (iii) resolution of legal proceedings involving the Company; (iv) reduced demand for office, multifamily or retail space, including as a result of the changes in the use of office space and remote work; (v) changes in our business strategy; (vi) a decline in Observatory visitors due to changes in domestic or international tourism, including due to health crises, geopolitical events, currency exchange rates, and/or competition from other observatories; (vii) defaults on, early terminations of, or non-renewal of, leases by tenants; (viii) increases in the Company’s borrowing costs as a result of changes in interest rates and other factors; (ix) declining real estate valuations and impairment charges; (x) termination of our ground leases; (xi) limitations on our ability to pay down, refinance, restructure or extend our indebtedness or borrow additional funds; (xii) decreased rental rates or increased vacancy rates; (xiii) difficulties in executing capital projects or development projects successfully or on the anticipated timeline or budget; (xiv) difficulties in identifying and completing acquisitions; (xv) impact of changes in governmental regulations, tax laws and rates and similar matters; (xvi) our failure to qualify as a REIT; (xvii) incurrence of taxable capital gain on disposition of an asset due to failure of compliance with a 1031 exchange program; (xviii) our disclosure controls and internal control over financial reporting, including any material weakness; and (xix) failure to achieve sustainability metrics and goals, including as a result of tenant collaboration, and impact of governmental regulation on our sustainability efforts. For a further discussion of these and other factors that could impact the Company's future results, performance, or transactions, see the section entitled “Risk Factors” in the Company’s Annual Report for the year ended December 31, 2023 and our quarterly report for the quarter ended June 30, 2024, and other risks described in documents subsequently filed by the Company from time to time with the SEC. While forward-looking statements reflect the Company's good faith beliefs, they do not guarantee future performance. Any forward-looking statement speaks only as of the date on which it was made, and we assume no obligation to update or revise publicly any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. Prospective investors should not place undue reliance on any forward-looking statements, which are based only on information currently available to the Company (or to third parties making the forward-looking statements). Overview Highlights for the three months ended September 30, 2024 • Net income attributable to common unitholders of $21.7 million. 30 • Core Funds From Operations ("Core FFO") of $69.2 million attributable to common unitholders. • Signed a total of 304,000 rentable square feet of new, renewal, and expansion leases. • Closed on $143.0 million of the previously announced $195.0 million acquisition of prime retail assets on North 6 th Street in Williamsburg, Brooklyn. The balance closed subsequent to quarter-end, in October 2024. • Announced agreement to acquire additional retail asset for approximately $30.0 million located on North 6 th Street in Williamsburg, Brooklyn. Results of Operations The discussion below relates to our results of operations for the three and nine months ended September 30, 2024 and 2023, respectively. Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023 The following table summarizes our historical results of operations: Three Months Ended September 30, 2024 2023 Change % (amounts in thousands) Real Estate Segment Observatory Segment Total Real Estate Segment Observatory Segment Total Revenues: Rental revenue $ 153,117 $ — $ 153,117 $ 151,458 $ — $ 151,458 $ 1,659 1.1 % Observatory revenue — 39,382 39,382 — 37,562 37,562 1,820 4.8 % Lease termination fees 4,771 — 4,771 — — — 4,771 N/A Third-party management and other fees 271 — 271 268 — 268 3 1.1 % Other revenues and fees 2,058 — 2,058 2,238 — 2,238 (180) (8.0) % Total revenues 160,217 39,382 199,599 153,964 37,562 191,526 8,073 4.2 % Operating expenses: Property operating expenses 45,954 — 45,954 42,817 — 42,817 (3,137) (7.3) % Ground rent expenses 2,331 — 2,331 2,331 — 2,331 — — % General and administrative expenses 18,372 — 18,372 16,012 — 16,012 (2,360) (14.7) % Observatory expenses — 9,715 9,715 — 9,471 9,471 (244) (2.6) % Real estate taxes 31,982 — 31,982 32,014 — 32,014 32 0.1 % Depreciation and amortization 45,861 38 45,899 46,593 31 46,624 725 1.6 % Total operating expenses 144,500 9,753 154,253 139,767 9,502 149,269 (4,984) (3.3) % Operating income 15,717 29,629 45,346 14,197 28,060 42,257 3,089 7.3 % Intercompany rent revenue (expense) 23,461 (23,461) — 22,113 (22,113) — — — % Other income (expense): Interest income 6,871 89 6,960 4,410 52 4,462 2,498 56.0 % Interest expense (27,408) — (27,408) (25,382) — (25,382) (2,026) (8.0) % Interest expense associated with property in receivership (1,922) — (1,922) — — — (1,922) N/A Gain on disposition of property 1,262 — 1,262 — — — 1,262 N/A Income before income taxes 17,981 6,257 24,238 15,338 5,999 21,337 2,901 13.6 % Income tax expense (216) (1,226) (1,442) (146) (1,263) (1,409) (33) (2.3) % Net income 17,765 5,031 22,796 15,192 4,736 19,928 2,868 14.4 % Private perpetual preferred unit distributions (1,050) — (1,050) (1,050) — (1,050) — — % Net income attributable to non-controlling interests in other partnerships — — — (111) — (111) 111 100.0 % Net income attributable to common unitholders $ 16,715 $ 5,031 $ 21,746 $ 14,031 $ 4,736 $ 18,767 $ 2,979 15.9 % 31 Real Estate Segment Rental Revenue The increase in rental revenue was primarily attributable to higher occupancy and higher operating and real estate tax expense escalations driving a $7.7 million increase during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. This was partially offset by the net impact of acquisitions and dispositions made during the comparative period, which reduced rental revenue by $6.0 million. Property Operating Expenses The increase in property operating expenses was primarily due to higher utilities costs and higher payroll costs during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. General and Administrative Expenses The increase in general and administrative expenses primarily reflects higher audit related costs and recognition of non-cash stock-based compensation expense of awards granted to executives that are nearing retirement eligibility during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Interest Income The increase in interest income in the three months ended September 30, 2024 reflects larger cash balances compared to the three months ended September 30, 2023. Interest Expense The increase in interest expense was primarily attributable to the new senior unsecured notes issuance in April 2024. Gain on Disposition of Property The gain on disposition activity for the three months ended September 30, 2024 represents the additional obligation we expect to be released arising from the accrued interest expense associated with the First Stamford Place mortgage, net of certain closing costs. Observatory Segment Observatory Revenue Observatory revenues were higher driven by increased ticket prices during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023 The following table summarizes our historical results of operations: Nine Months Ended September 30, 2024 2023 Change % (amounts in thousands) Real Estate Segment Observatory Segment Total Real Estate Segment Observatory Segment Total Revenues: Rental revenue $ 459,469 $ — $ 459,469 $ 446,152 $ — $ 446,152 $ 13,317 3.0 % Observatory revenue — 98,102 98,102 — 93,149 93,149 4,953 5.3 % Lease termination fees 4,771 — 4,771 — — — 4,771 N/A Third-party management and other fees 912 — 912 1,076 — 1,076 (164) (15.2) % Other revenues and fees 7,067 — 7,067 6,313 — 6,313 754 11.9 % Total revenues 472,219 98,102 570,321 453,541 93,149 546,690 23,631 4.3 % Operating expenses: Property operating expenses 132,530 — 132,530 124,380 — 124,380 (8,150) (6.6) % Ground rent expenses 6,994 — 6,994 6,994 — 6,994 — — % 32 General and administrative expenses 52,364 — 52,364 47,795 — 47,795 (4,569) (9.6) % Observatory expenses — 27,104 27,104 — 25,983 25,983 (1,121) (4.3) % Real estate taxes 96,106 — 96,106 95,292 — 95,292 (814) (0.9) % Depreciation and amortization 139,346 107 139,453 140,194 118 140,312 859 0.6 % Total operating expenses 427,340 27,211 454,551 414,655 26,101 440,756 (13,795) (3.1) % Operating income 44,879 70,891 115,770 38,886 67,048 105,934 9,836 9.3 % Intercompany rent revenue (expense) 60,508 (60,508) — 58,969 (58,969) — — — % Other income (expense): Interest income 16,022 208 16,230 10,257 139 10,396 5,834 56.1 % Interest expense (77,859) — (77,859) (76,091) — (76,091) (1,768) (2.3) % Interest expense associated with property in receivership (2,550) — (2,550) — — — (2,550) N/A Loss on early extinguishment of debt (553) — (553) — — — (553) N/A Gain on disposition of property 12,065 — 12,065 29,261 — 29,261 (17,196) (58.8) % Income before income taxes 52,512 10,591 63,103 61,282 8,218 69,500 (6,397) (9.2) % Income tax expense (537) (1,000) (1,537) (541) (382) (923) (614) (66.5) % Net income 51,975 9,591 61,566 60,741 7,836 68,577 (7,011) (10.2) % Private perpetual preferred unit distributions (3,151) — (3,151) (3,151) — (3,151) — — % Net income attributable to non-controlling interests in other partnerships (4) — (4) (69) — (69) 65 (94.2) % Net income attributable to common unitholders $ 48,820 $ 9,591 $ 58,411 $ 57,521 $ 7,836 $ 65,357 $ (6,946) (10.6) % Real Estate Segment Rental Revenue The increase in rental revenue was primarily attributable to higher occupancy and higher operating and real estate tax expense escalations driving a $23.0 million increase during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This was partially offset by the net impact of acquisitions and dispositions made during the comparative period, which reduced rental revenue by $9.7 million. Property Operating Expenses The increase in property operating expenses was primarily due to higher utilities and cleaning costs, higher payroll costs and higher repair and maintenance costs during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. General and Administrative Expenses The increase in general and administrative expenses primarily reflects higher audit related costs and recognition of non-cash stock-based compensation expense of awards granted to executives that are nearing retirement eligibility during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Interest Income The increase in interest income in the nine months ended September 30, 2024 reflects higher interest rates and larger cash balances compared to the nine months ended September 30, 2023. Interest Expense The increase in interest expense was primarily attributable to the new senior unsecured notes issuance in April 2024. Gain on Disposition of Property The gain on disposition activity for the nine months ended September 30, 2024 relates to the disposition of First Stamford Place in Stamford, Connecticut in May 2024. The gain on disposition activity for the nine months ended September 30, 2023 relates to the disposition of 500 Mamaroneck Avenue in Harrison, New York in April 2023 and 69-97 and 103-107 Main Street in Westport, Connecticut in February 2023. 33 Observatory Segment Observatory Revenue Observatory revenues were higher driven by increased visitation and ticket prices during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2024. Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, including lease-up costs, fund our redevelopment and repositioning programs, acquire properties, make distributions to our securityholders and fulfill other general business needs. Based on the historical experience of our management and our business strategy, in the foreseeable future we anticipate we will generate positive cash flows from operations. In order for ESRT to qualify as a REIT, ESRT is required under the Internal Revenue Code of 1986 to distribute to its stockholders, on an annual basis, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We expect to make quarterly distributions, as required, to our securityholders. While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. Our primary sources of liquidity will generally consist of cash on hand, cash generated from our operating activities, debt issuances and unused borrowing capacity under our unsecured revolving credit facility. We expect to meet our short-term liquidity requirements, including distributions, operating expenses, working capital, debt service, and capital expenditures from cash flows from operations, cash on hand, debt issuances, and available borrowing capacity under our unsecured revolving credit facility. The availability of these borrowings is subject to the conditions set forth in the applicable loan agreements. We expect to meet our long-term capital requirements, including acquisitions, redevelopments and capital expenditures through our cash flows from operations, cash on hand, our unsecured revolving credit facility, mortgage financings, debt issuances, common and/or preferred equity issuances and asset sales. Our properties require periodic investments of capital for individual lease related tenant improvement allowances, general capital improvements and costs associated with capital expenditures. Our overall leverage will depend on our mix of investments and the cost of leverage. ESRT's charter does not restrict the amount of leverage that we may use. At September 30, 2024, we had $421.9 million available in cash and cash equivalents, and $500.0 million available under our unsecured revolving credit facility. As of September 30, 2024, we had approximately $2.3 billion of total consolidated indebtedness outstanding, with a weighted average interest rate of 4.27% and a weighted average maturity of 5.3 years. Portfolio Transaction Activity On February 1, 2023, we closed on the sale of 69-97 and 103-107 Main Street in Westport, Connecticut at a gross asset valuation of $40.0 million. On April 5, 2023, we closed on the sale of 500 Mamaroneck Avenue in Harrison, New York at a gross asset valuation of $53.0 million. On September 14, 2023, we closed on the acquisition of a Williamsburg retail property located on the corner of North 6 th Street and Wythe Avenue in Brooklyn, New York, for a purchase price of $26.4 million. On March 28, 2024, we executed a buyout of the 10% non-controlling interest in two of our multifamily properties located at 561 10 th Avenue and 345 East 94 th Street in Manhattan for $14.2 million in cash and the assumption of $18.0 million of in-place debt and now own 100% of the ownership interests in these assets. On September 25, 2024, we closed on the acquisition of a portfolio of retail properties on North 6 th Street in Williamsburg, Brooklyn for a purchase price of $143.0 million. Subsequent to quarter-end, in October 2024, we closed on the acquisition of additional retail properties on North 6 th Street in Williamsburg, Brooklyn for approximately $52.0 million. In September 2024, we entered into an agreement to acquire an additional retail asset on North 6 th Street in Williamsburg, Brooklyn for approximately $30.0 million. This acquisition is subject to customary closing conditions. The acquisition is anticipated to close in mid-2025. 34 Unsecured Revolving Credit and Term Loan Facilities In March 2024, we closed on the BofA Credit Facilities, a $715 million, five-year unsecured credit agreement which consists of the $620.0 million Revolving Credit Facility and the $95.0 million BofA Term Loan Facility. The Revolving Credit Facility matures on March 8, 2029, inclusive of two six-month extension periods and replaced the existing revolving credit facility that was due to mature in March 2025. The BofA Term Loan Facility matures on March 8, 2029, inclusive of two twelve-month extension periods and replaced the existing term loan facility that was due to mature in March 2025. Initial interest rates on the BofA Credit Facilities, which may change based on our leverage levels, are adjusted SOFR plus 130 basis points for any drawn portion of the Revolving Credit Facility and adjusted SOFR plus 150 basis points for the BofA Term Loan Facility. In addition, the BofA Credit Facilities have a sustainability-linked pricing mechanism that reduces the borrowing spread if certain benchmarks are achieved each year. See "Financial Statements - Note 5 Debt" for a summary of our unsecured revolving credit and term loan facilities. Financial Covenants As of September 30, 2024, we were in compliance with the following financial covenants: Financial Covenant Required September 30, 2024 In Compliance Maximum total leverage < 60% 33.2 % Yes Maximum secured leverage < 40% 10.7 % Yes Minimum fixed charge coverage > 1.50x 2.9x Yes Minimum unencumbered interest coverage > 1.75x 4.7x Yes Maximum unsecured leverage < 60% 26.4 % Yes Mortgage Debt As of September 30, 2024, mortgage notes payable, net, amounted to $705.6 million. We have no mortgage debt maturity until April 2026. In April 2024, we worked with the First Stamford P lace mortgage lender to structure a consensual foreclosure. In May 2024, the First Stamford Place property was placed in receivership and accordingly, we reclassified the related debt and applicable accrued interest to debt associated with property under receivership and accrued interest associated with property in receivership, respectively, in our condensed consolidated balance sheet. As of September 30, 2024, this debt consists of a $164 million mortgage loan bearing interest at 4.09% and a $11.9 million loan bearing interest at 6.25%. In connection with this we recorded a contract asset which represents the amount of obligation we expect to be released upon the final resolution of the foreclosure process on the First Stamford Place property. In July 2024, we executed an agreement for the refinance of the mortgage for the Metro Center property that was due to mature in November 2024. Beginning in November 2024, the new loan balance of $71.6 million will be interest-only at the same interest rate of 3.59%, with a maturity of November 2029, inclusive of a one-year extension option. See "Financial Statements - Note 5 Debt" for more information on mortgage debt. Senior Unsecured Notes On April 10, 2024, we entered into a Purchase Agreement pursuant to which we issued and sold an aggregate $225 million principal amount of notes, consisting of (a) $155 million aggregate principal amount of 7.20% Series I Green Guaranteed Senior Notes due June 17, 2029, (b) $45 million aggregate principal amount of 7.32% Series J Green Guaranteed Senior Notes due June 17, 2031 and (c) $25 million aggregate principal amount of 7.41% Series K Green Guaranteed Senior Notes due June 17, 2034. The sale of the Series I-K notes closed on June 17, 2024. The issue price for the notes was 100% of the aggregate principal amount thereof. Pursuant to the terms of the Purchase Agreement, we may prepay all or a portion of the notes upon notice to the holders at a price equal to 100% of the principal amount plus a make-whole premium as set forth in the Purchase Agreement. The terms of our senior unsecured notes, including the Series I-K notes, include customary covenants, including limitations on liens, investment, distributions, debt, fundamental changes, and transactions with affiliates and require certain customary financial reports. The terms also require compliance with financial ratios including a maximum leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a minimum unencumbered interest coverage ratio, and a maximum unsecured leverage ratio. The agreements also contain customary events of default (subject in certain cases to specified cure periods), including but not limited to non-payment, breach of covenants, representations or warranties, cross defaults, bankruptcy or other insolvency events, judgments, ERISA events, the occurrence of certain change of control transactions and loss of REIT qualification. As of September 30, 2024, we were in compliance with these covenants. See "Financial Statements - Note 5 Debt" for more information on senior unsecured notes. 35 Leverage Policies We expect to employ leverage in our capital structure in amounts determined from time to time by ESRT's Board of Directors. Although ESRT's Board of Directors has not adopted a policy that limits the total amount of indebtedness that we may incur, we anticipate that ESRT's Board of Directors will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the amount of such indebtedness that will be either fixed or floating rate. ESRT's charter and bylaws do not limit the amount or percentage of indebtedness that we may incur nor do they restrict the form in which our indebtedness will be taken (including, but not limited to, recourse or non-recourse debt and cross-collateralized debt). Our overall leverage will depend on our mix of investments and the cost of leverage. ESRT's Board of Directors may from time to time modify our leverage policies in light of the then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general market conditions for debt and equity securities, fluctuations in the market price of ESRT's common stock and our traded OP units, growth and acquisition opportunities and other factors. Capital Expenditures The following tables summarize our tenant improvement costs, leasing commission costs and our capital expenditures for each of the periods presented (dollars in thousands, except per square foot amounts). Office Properties (1)(2) Nine Months Ended September 30, Total New Leases, Expansions, and Renewals (3) 2024 2023 Number of leases signed (4) 82 68 Total square feet 921,671 782,786 Leasing commission costs per square foot (5) $ 18.53 $ 18.23 Tenant improvement costs per square foot (5) 58.67 77.25 Total leasing commissions and tenant improvement costs per square foot (5) $ 77.20 $ 95.48 Retail Properties (2)(6) Nine Months Ended September 30, Total New Leases, Expansions, and Renewals (3) 2024 2023 Number of leases signed (4) 9 5 Total square feet 24,240 14,263 Leasing commission costs per square foot (5) $ 74.29 $ 47.80 Tenant improvement costs per square foot (5) 35.87 48.17 Total leasing commissions and tenant improvement costs per square foot (5) $ 110.16 $ 95.97 _______________ (1) Excludes an aggregate of 475,744 and 498,672 rentable square feet of retail space in our Manhattan office properties in 2024 and 2023, respectively. Includes the Empire State Building broadcasting licenses and Observatory operations. (2) The tables above exclude our multifamily properties. (3) Beginning in 2024, the number of leases signed include "Early Renewals" which are leases signed over two years prior to the lease expiration. Amounts for number of leases signed, total square feet, leasing commission costs per square foot and tenant improvement costs per square foot have been adjusted to include the impact of early renewals for the nine months ended September 30, 2023. (4) Presents a renewed and expansion lease as one lease signed. (5) Presents all tenant improvement and leasing commission costs as if they were incurred in the period in which the lease was signed, which may be different than the period in which they were actually paid. (6) Includes an aggregate of 475,744 and 498,672 rentable square feet of retail space in our Manhattan office properties in 2024 and 2023, respectively. (amounts in thousands) Nine Months Ended September 30, Total Commercial Portfolio 2024 2023 Capital expenditures (1) $ 48,878 $ 38,736 _______________ (1) Includes all capital expenditures, excluding tenant improvements and leasing commission costs. As of September 30, 2024, we expect to incur additional costs relating to obligations under existing lease agreements of approximately $126.5 million for tenant improvements and leasing commissions. We intend to fund the tenant improvements and leasing commission costs through a combination of operating cash flow, cash on hand and other borrowings. 36 Capital expenditures are considered part of both our short-term and long-term liquidity requirements. We intend to fund capital improvements through a combination of operating cash flow, cash on hand and borrowings. Off-Balance Sheet Arrangements As of September 30, 2024, we did not have any off-balance sheet arrangements. Distribution Policy We intend to distribute our net taxable income to our securityholders in a manner intended to satisfy REIT distribution requirements and to avoid U.S. federal income tax liability. Before we pay any distribution, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and obligations to make payments of principal and interest, if any. However, under some circumstances, we may be required to use cash reserves, incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy REIT distribution requirements. Distribution to Equity Holders Distributions and dividends amounting to $31.8 million and $30.8 million have been made to equity holders for the nine months ended September 30, 2024 and 2023, respectively. Stock and Publicly Traded Operating Partnership Unit Repurchase Program ESRT's Board of Directors authorized the repurchase of up to $500.0 million of ESRT Class A common stock and our Series ES, Series 250 and Series 60 operating partnership units from January 1, 2024 through December 31, 2025. Under the program, ESRT may purchase ESRT Class A common stock and we may purchase our Series ES, Series 250 and Series 60 operating partnership units in accordance with applicable securities laws from time to time in the open market or in privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by ESRT and us at our discretion and will be subject to stock price, availability, trading volume, general market conditions, and applicable securities laws. The authorization does not obligate ESRT or us to acquire any particular amount of securities, and the program may be suspended or discontinued at ESRT's and our discretion without prior notice. As of September 30, 2024, we had $500.0 million remaining of the authorized repurchase amount. There were no repurchases of equity securities during the three and nine months ended September 30, 2024. See "Financial Statements - Note 10. Capital." Cash Flows Comparison of Nine Months Ended September 30, 2024 to the Nine Months Ended September 30, 2023 Net cash . Cash and cash equivalents and restricted cash were $469.9 million and $421.0 million, respectively, as of September 30, 2024 and 2023. The increase was primarily the result of the following changes in cash flows: Operating activities . Net cash provided by operating activities increased by $14.8 million to $210.9 million primarily due to an increase in revenue including decreases in rent concessions and increase in lease termination fees. These increases are partially offset by decreases in working capital, particularly a reduction in security deposits as more tenants replaced cash deposits with letters of credit in the current period, as well as the derecognition of First Stamford Place in May 2024. Investing activities . Net cash used in investing activities increased by $279.1 million to $318.5 million primarily due to the $143.4 million acquisition of a portfolio of retail properties on North 6 th Street in Williamsburg in September 2024, compared to the $26.9 million acquisition of retail properties on North 6 th Street in Williamsburg in September 2023. In addition, in the nine months ended September 30, 2024 there were no proceeds from dispositions of properties compared to $88.9 million of proceeds on dispositions received in the nine months ended September 30, 2023 (see "Financial Statements - Note 3. Acquisitions and Dispositions"). Net cash used in investing activities also increased due to a $42.5 million increase in capital expenditures and redevelopment in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Financing activities . Net cash provided by financing activities increased by $221.0 million to $170.6 million primarily due to proceeds from a private placement of senior unsecured notes in the current period. See "Financial Statements - Note 5. Debt." Net Operating Income Net operating income ("NOI") is a non-GAAP financial measure of performance. NOI is used by our management to evaluate and compare the performance of our properties and to determine trends in earnings and to compute the fair value of our properties as it is not affected by: (i) the cost of funds of the property owner, (ii) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (iii) acquisition expenses, loss on 37 early extinguishment of debt, impairment charges and loss from derivative financial instruments, or (iv) general and administrative expenses and other gains and losses that are specific to the property owner. The cost of funds is eliminated from NOI because it is specific to the particular financing capabilities and constraints of the owner. The cost of funds is eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our office or retail properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly-timed purchases or sales. We believe that eliminating these costs from net income is useful to investors because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs. However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness. NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income computed in accordance with GAAP and discussions elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding the components of net income that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly titled measures and, accordingly, our NOI may not be comparable to similarly titled measures reported by other companies that do not define the measure exactly as we do. The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to NOI: Three Months Ended September 30, Nine Months Ended September 30, (amounts in thousands) 2024 2023 2024 2023 (unaudited) (unaudited) Net income $ 22,796 $ 19,928 $ 61,566 $ 68,577 Add: General and administrative expenses 18,372 16,012 52,364 47,795 Depreciation and amortization 45,899 46,624 139,453 140,312 Interest expense 27,408 25,382 77,859 76,091 Interest expense associated with property in receivership 1,922 — 2,550 — Loss on early extinguishment of debt — — 553 — Income tax expense 1,442 1,409 1,537 923 Less: Gain on sale/disposition of property (1,262) — (12,065) (29,261) Third-party management and other fees (271) (268) (912) (1,076) Interest income (6,960) (4,462) (16,230) (10,396) Net operating income $ 109,346 $ 104,625 $ 306,675 $ 292,965 Other Net Operating Income Data Straight-line rental revenue $ 2,277 $ 5,015 $ 7,238 $ 17,430 Net increase in rental revenue from the amortization of above-and below-market lease assets and liabilities $ 476 $ 554 $ 1,503 $ 1,932 Amortization of acquired below-market ground leases $ 1,958 $ 1,957 $ 5,874 $ 5,873 Funds from Operations ("FFO") We present below a discussion of FFO. We compute FFO in accordance with the “White Paper” on FFO published by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding impairment write-off of investments in depreciable real estate and investments in in-substance real estate investments, gains or losses 38 from debt restructurings and sales of depreciable operating properties, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), less distributions to non-controlling interests and gains/losses from discontinued operations and after adjustments for unconsolidated partnerships and joint ventures. FFO is a widely recognized non-GAAP financial measure for REITs that we believe, when considered with financial statements determined in accordance with GAAP, is useful to investors in understanding financial performance and providing a relevant basis for comparison among REITs. In addition, we believe FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate has generally appreciated over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating performance. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of performance is limited. There can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs. FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another. Modified Funds From Operations ("Modified FFO") Modified FFO adds back an adjustment for any above or below-market ground lease amortization to traditionally defined FFO. We believe this a useful supplemental measure in evaluating our operating performance due to the non-cash accounting treatment under GAAP, which stems from the third quarter 2014 acquisition of two option properties following our formation transactions as they carry significantly below market ground leases, the amortization of which is material to our overall results. We present Modified FFO because we believe it is an important supplemental measure of our operating performance in that it adds back the non-cash amortization of below-market ground leases. There can be no assurance that Modified FFO presented by us is comparable to similarly titled measures of other REITs. Modified FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Modified FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Core Funds From Operations Core FFO adds back to Modified FFO the following items: Interest expense associated with property in receivership and loss on early extinguishment of debt. The Company believes Core FFO is an important supplemental measure of its operating performance because it excludes non-recurring items. There can be no assurance that Core FFO presented by the Company is comparable to similarly titled measures of other REITs. Core FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP or to cash flow from operating activities determined in accordance with GAAP. Core FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results. The following table presents a reconciliation of our net income, the most directly comparable GAAP measure, to FFO, Modified FFO and Core FFO: 39 Three Months Ended September 30, Nine Months Ended September 30, (amounts in thousands) 2024 2023 2024 2023 (unaudited) (unaudited) Net income $ 22,796 $ 19,928 $ 61,566 $ 68,577 Non-controlling interests in other partnerships — (111) (4) (69) Private perpetual preferred unit distributions (1,050) (1,050) (3,151) (3,151) Real estate depreciation and amortization 44,871 45,174 136,126 136,085 Gain on disposition of property (1,262) — (12,065) (29,261) FFO attributable to common unitholders 65,355 63,941 182,472 172,181 Amortization of below-market ground leases 1,958 1,957 5,874 5,873 Modified FFO attributable to common unitholders 67,313 65,898 188,346 178,054 Interest expense associated with property in receivership 1,922 — 2,550 — Loss on early extinguishment of debt — — 553 — Core FFO attributable to common unitholders $ 69,235 $ 65,898 $ 191,449 $ 178,054 Weighted average Operating Partnership units Basic 264,787 262,756 264,675 263,379 Diluted 269,613 266,073 268,608 265,269 Factors That May Influence Future Results of Operations Leasing Due to the relatively small number of leases that are signed in any particular quarter, one or more larger leases may have a disproportionately positive or negative impact on average rent, tenant improvement and leasing commission costs for that period. As a result, we believe it is more appropriate when analyzing trends in average rent and tenant improvement and leasing commission costs to review activity over multiple quarters or years. Tenant improvement costs include expenditures for general improvements occurring concurrently with, but that are not directly related to, the cost of installing a new tenant. Leasing commission costs are similarly subject to significant fluctuations depending upon the length of leases being signed and the mix of tenants from quarter to quarter. As of September 30, 2024, there were approximately 0.6 million rentable square feet of space in our portfolio available to lease (excluding leases signed but not yet commenced) representing 7.0% of the net rentable square footage of the properties in our commercial portfolio. In addition, leases representing 2.6% and 6.3% of net rentable square footage of the properties in our commercial portfolio will expire in 2024 and in 2025, respectively. These leases are expected to represent approximately 2.3% and 6.9%, respectively, of our annualized rent for such periods. Our revenues and results of operations can be impacted by expiring leases that are not renewed or re-leased or that are renewed or re-leased at base rental rates equal to, above or below the current average base rental rates. Further, our revenues and results of operations can also be affected by downtime after space is vacated and the costs we incur to re-lease available space, including payment of leasing commissions, redevelopments and build-to-suit remodeling that may not be borne by the tenant. Observatory Operations For the nine months ended September 30, 2024, the Observatory hosted 1,860,000 visitors, compared to 1,852,000 visitors for the nine months ended September 30, 2023, an increase of 0.4%. Observatory revenue for the nine months ended September 30, 2024 was $98.1 million, a 5% increase from $93.1 million for the nine months ended September 30, 2023. The Observatory revenue increase was driven by higher visitation levels and ticket prices in 2024. Observatory revenues and admissions are dependent upon the following: (i) the number of tourists (domestic and international) who come to New York City and visit the Observatory, as well as any related tourism trends; (ii) the prices per admission that can be charged; (iii) seasonal trends affecting the number of visitors to the Observatory; (iv) competition, in particular from other new and existing observatories; and (v) weather trends. Outlook Year to date in 2024, ESRT has benefited from solid leasing activity and Observatory performance. We believe the global economy, including the real estate sector, currently navigates an environment of uncertainty around inflation, higher interest rates, reduced availability of commercial real estate loans, questions on the direction of capital markets, risk of recession and 40 geopolitical unrest. In particular, there have been concerns about the softening of the office real estate market in particular, amidst refinancing challenges of existing low interest rate loans and associated reduced new loan availability and increased costs of loans and related increased expectations of equity returns, coupled with the gradual pace of return-to-office and its impact on the physical utilization of space and asset valuations. Additionally, the risk of a global economic recession could impact the number of visitors to the Empire State Building Observatory, as well as our pricing power. Despite this global economic backdrop, we believe that ESRT is in a good competitive position with diversified drivers of income across office, retail, multifamily and the Empire State Building Observatory. ESRT’s New York City-focused portfolio is modernized, amenitized, well-located and energy efficient, with indoor environmental quality, competitive rental rates and strong leased percentages. We believe our business is further fortified by the continued performance of our Observatory attraction. In addition to our diversified portfolio, our business is supported by a well-positioned balance sheet, modest leverage and good access to liquidity as set forth herein. The absence of unaddressed near term debt maturities provides an added degree of security in a rising rate environment. This provides us optionality to execute on capital recycling, acquisitions, and buybacks. As we navigate these uncertain times, we remain prepared for various challenges and situations. Critical Accounting Estimates Refer to our Annual Report for a discussion of our critical accounting estimates. There were no material changes to our critical accounting estimates disclosed in our Annual Report. 41